If you want some free stock trading education on how the statements of key government officials can impact equity markets, the response created as a result of the testimony that Federal Reserve Chairman Ben Bernanke provided on July 17 could serve as a helpful lesson.
The S&P 500 Index was having a strong day, trading 0.3 percent higher at 1,680.97 at 2:31 p.m. in New York, according to Bloomberg. The benchmark group of stocks rose to a new record on the day before, but lost these gains early in the next session. The Dow Jones Industrial Average was also doing well, trading up less than 0.1 percent at 15,457.93.
"The market is responding to the fact that the Fed is not going to create an arbitrary definition of when and how the QE program is going to end," Stephen Wood, the New York-based chief market strategist at Russell Investments, told the news source. "They want to maintain flexibility in their policies."
Bernanke signaled the flexibility that the Federal Open Market Committee has in regards to quantitative easing, stating that the rate of these bond purchases could be stepped up - or alternatively, decreased - depending on the strength of the economy, the media outlet reports.
In his testimony, the central bank chief specifically singled out inflation as a major concern, stating that he wants it to increase more quickly, according to The New York Times. The price level has risen very slowly during the 12 months that ended in May, increasing 1 percent during this period. This figure is significantly lower than the target growth rate of 2 percent that the central bank has set as a goal.
This emphasis on pushing inflation higher represents a contrast to the prior communications of the Fed chief, as he has mostly noted the importance of the broader economy and the labor market.
"Our intention is to keep monetary policy highly accommodative for the foreseeable future," Bernanke stated, according to the media outlet. "Because inflation is below our target and unemployment is quite high."
He noted that the future of QE provided by the Federal Reserve will be largely responsive to economic reports, according to Bloomberg.
"We're going to be responding to the data," Bernanke said during his testimony, the news source reports. "If the data are stronger than we expect, we'll move more quickly" to lower these purchases of debt-based assets. In the event that reports providing data "don't meet the kinds of expectations we have about where the economy's going, then we would delay that process or potentially increase purchases for a time."
Bernanke's likely exit
However, the New York Times reports that there are various other decision makers who are members of the FOMC, and the behavior of the asset markets could hinge on his ability to convince the broader public that his influence will be sustained when his term ends in January. Once this term is complete, most predict that he will leave his current post.
Bernanke has provided a positive slant on the sharp reaction that global asset markets had to his remarks that QE could be reduced this year and eliminated next year, saying that the correction might have helped to right positions that were "excessively risky or leveraged." This comes after several market experts have speculated that the value of many assets worldwide have been pushed higher as a result of the record stimulus provided by the Fed.
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